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Mumbai: Credit rating firms have put more companies under ‘rating watch’ in the past one year than in the last 12 years following loan defaults by the IL&FS Group that has heightened concerns over the health of indebted companies.

The total worth of corporate bonds under ratings watch has touched Rs 10 lakh crore in FY19 and now constitutes nearly 10 per cent of the total corporate debt, according to data compiled from the Securities and Exchange Board of India (Sebi), which is available since 2007-08. In 2017-18, corporate bonds worth Rs 2 lakh crore were put under ratings watch.

The data takes into consideration is longterm debt with tenure of more than one year and is aggregate of total rating actions taken by the seven credit rating firms registered with Sebi during the period.

Ratings watch is used by the rating agencies when there is an unanticipated event in a company whose credit implications are either unclear or not fully ascertainable. Events that prompt a CRA to place any paper under ratings watch include sudden regulatory developments, change in the ownership control or a significant corporate action like merger or demerger. The action is meant to be for short-term purposes and once the event happens, the paper is either upgraded or downgraded based on the outcome.
A bulk of this rating action was taken during December 2018 as credit rating firms went on a defensive post the IL&FS fallout. Facing the heat from both regulators and investors for IL&FS, rating agencies started placing debt papers with any credible risks under ratings watch, say market participants.

“There is increased activism post the IL&FS issue,” says Mahendra Jajoo, chief investment officer (Fixed Income), Mirae Asset Management. Sectors like NBFC, real estate and construction have been under tremendous pressure and hence a lot of companies are under watch. Post the crisis, rating agencies are in no mood to listen and have started taking action.

“Earlier, rating agencies used to listen to the issuer, but after the IL&FS issue there is a lot of regulatory pressure,” says a fund manager at a domestic fund house.

Rating agencies drew flak in the IL&FS episode as they had abruptly downgraded the top-rated debt of IL&FS in 2018. The IL&FS fiasco resulted in a crisis in several housing finance companies, sparking a sell-off in the financial markets. For instance, both the debt and equity markets witnessed a panic during September after rumours surfaced about Dewan Housing Finance’s (DHFL) heath. Soon, rating agencies jumped into damage control mode and started putting the papers with negative news development on ratings watch.

“In November-December, we saw flurry of news developments and there was a sense of panic among the investors. In such a scenario, we decided to proactively put several bonds under ratings watch,” said a highly placed rating agency official. “We will be reviewing the papers that were put under ratings watch after the end of March quarter and wherever the companies haven’t seen any significant deterioration, we will remove the watch and retain the old rating.”